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Goldman Sachs has started seeing coal stocks as a Buy. But they are being very picky in their selections.

In a note published Friday, Goldman analysts Neil Mehta and Vinit Joshi issued a mix of outlooks for the batter coal sector, among them Buy ratings on CONSOL Energy (CNX) and SunCoke Energy (SXC) and a Sell on Arch Coal (ACI).

Plagued by falling commodity prices, weak volumes and government regulations, few industries have suffered the kind of punishment that coal stocks have seen in 2013. Shares have risen since July on improving confidence. Still, at $19.22, the Market Vectors Coal ETF (KOL) sits almost 24% below where it traded on Dec. 31.

But Mehta and Joshi are “neutral” on the industry, and suggest that investors avoid pure play coal name. They do suggest looking for “sum-of-the-parts” stories and names with strong balance sheets. They write:

The coal sector continues to face challenges including coal plant retirements, high net debt levels and commodity prices below historical averages. But we see some reasons for optimism, including the bottoming of met coal prices, YTD underperformance versus the S&P500 of 44% and some strong company-specific ideas, namely CNX and SXC.

As for specific stocks, the Goldman analysts issued five ratings changes:

Upgrade CONSOL Energy to Buy given strong production growth at its E&P segment, improving cash flow from the coal business and potential for asset sales/restructuring to help realize its SOTP value.

Most energy stocks were trading lower in sympathy with the market today, as crude oil was down nearly 2% at midday.

Total (TOT) and Shell (RDSA) were in focus; the former gave a rare warning about the potential environmental damages resulting from arctic drilling. In an interview with the Financial Times, Total Chief Executive Christophe de Margerie said that a spill in an ecosystem like Greenland would be a “disaster,” both for the environment and the company’s imagine.

The news of course comes as Shell pushes ahead with its own arctic drilling plans, off the coast of Alaska. A spokesman for Shell toldMarketWatch that the company “believes that the Arctic has significant untapped potential and will play an increasingly important role in meeting the energy challenge.”

Shell was recently down 1.1%, while Total slid 1.8%.

Elsewhere, Alpha Natural Resources (ANR) was up more than 2%. After its split into two companies, Kraft (KFT) will replace Alpha Natural in the S&P 500, which is being bumped down to the Midcap 400. The coal producer is the S&P 500’s worst-performing stock this year, losing 68% through Tuesday’s close.

Freport-McMoran Copper & Gold (FCX) tends to trade in tandem with the price of copper, but there’s been less correlation recently, notes Citi analyst Brain Yu. FCX has fallen in recent weeks, even as copper prices have held up relatively well.

“Our upgrade is based on our view that the copper will remain tight with prices averaging $3.85/lb in 2012 and $3.80/lb in 2013; FCX’s lagging share price relative to copper prices; a meaningful dividend yield of 3.4%; and a healthy balance sheet with net cash of $1.3 bln at the end of 4Q11.”

Yu also thinks Alpha Natural Resources (ANR) can withstand a decline in the price of thermal coal. He raised his rating to Buy.

“Shares have suffered with the decline in met coal pricing and collapse in thermal coal demand. In hindsight, the purchase of Massey Energy and increased exposure to troubled Central Appalachia assets did not help. That said, ANR is trading at a shadow of its former self and we believe it is time to buy the shadow. In our opinion, weak domestic coal fundamentals are mostly reflected in ANR shares and even assuming natural gas prices remain at $2/MMBtu, we expect thermal coal demand to improve in 2013.”

In a note out today, he wrote that after publishing stress test results for thermal and met coal in the past three weeks, “one of the biggest takeaways was that open tonnage on the thermal side this year is unlikely to be contracted, while export comps will become more and more difficult as the year progresses. The good news is that we are seeing indications that met coal pricing may have hit an inflection point, and remain comfortable with our full-year average $220/mt FOB hard cokingcoal price deck….We have taken this opportunity to all but zero out unsold thermal tonnage in 2012, boost cost assumptions to near the top of guidance ranges, and lower our 2013 sales assumptions for both tonnage and realized price. We have lowered our price deck for the PRB to $13/ton next year for 8,800 Btu/lb coal, down from $14.50/ton previously. We are lowering our price deck for CAPP to $72/ton next year form $78/ton previously. We are assuming NAPP discounts of $8/ton off of CAPP pricing. Finally, we have assumed at or near the top of cost guidance for all companies based on lower volumes.”

Scott writes that he expects the coming earnings season will see “widespread sales guidance lowering and cost pressures, as not only unbooked tonnage but also existing sales come under pressure from weak gas prices, weak demand and mild weather.” However, he is encouraged that prices for global seaborne met coal may be firming and lists Peabody (BTU) and Walter Energy (WLT) as his top picks.

Still, he lowered his price target on Peabody by $3 to $45 and his target on Walter by $2 to $70. Other companies, all of which Scott rates at Buy, also got price target cuts: Arch Coal (ACI) went from $20 to $25, Alpha Natural Resources (ANR) went from $27 to $19, Cloud Peak Energy (CLD) went from $28 to $25, and Consol Energy (CNX) went from $41 to $40.

With earnings season beginning tonight, Barclays Capital analyst David Gagliano revised first quarter estimates for a half dozen companies in his coverage universe, mostly to reflect commodities pricing.

In a note out today he wrote that while he remains “concerned” about the long-term picture for U.S. thermal coal, he thinks that the stocks “appear ripe for a near-term rebound during the first quarter reporting season.”

He thinks stocks could move up given some early signs of stabilization in both met and thermal coal prices and that companies will likely highlight capacity cuts during their reports. “While it remains to be seen whether the announced cuts will be enough to re-balance the US coal market, in our view typically when there are large production cuts announced, the stocks react favorably. To be clear, we do not expect earnings ‘beats’. Instead, we believe additional downward estimate revisions are likely due to the production cuts that we believe are inevitable. However, in our view, the equities are more sensitive to directional shifts in underlying supply/demand drivers, rather than directional shifts in earnings expectations, at this stage in the investment cycle.”

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